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Essays in empirical macroeconomcs Kano, Takashi

Abstract

This thesis consists of three essays that contribute empirical macroeconomics. The first essay jointly tests several of the predictions of the intertemporal approach to the current account and one of its implications, the present value model of the current account (PVM). The intertemporal approach to the current account predicts that the current account of a small open economy is independent of.world common disturbances. The PVM predicts that the response of the current account to a country-specific shock depends on the persistence of the shock. This essay combines these predictions to identify a structural vector autoregression (SVAR). The identification exploits the orthogonality of the world real interest rate and country-specific shocks as well as the lack of a longrun response of net output to transitory shocks. Estimates of the SVAR show that the Canadian and U.K. data support the intertemporal approach with two puzzling exceptions . A recent study claims that habit formation in consumption improves the ability of the PVM of the current account to predict actual current account movements. The second essay shows that the habit-forming P VM of the current account is observationally equivalent to the canonical PVM augmented with a transitory consumption shock. To resolve the identification problem, this essay constructs a small open economy-real business cycle (SOE-RBC) models with habits and stochastic world real interest rates calibrated to Canadian postwar quarterly data. The results from Monte Carlo experiments reveal that to explain sample moments conditional on the habit-forming and standard PVMs, the SOE-RBC model with stochastic world real interest rates dominates the SOE-RBC model with habit formation. The third essay explores the ability of habit formation in consumption, in the context of the one-sector, closed economy-RBC model,'to account for the U.S. growth rates of consumption and output. Existing studies show that habit formation helps successfully explain the negative response of labour input to a positive, permanent technology shock as well as the empirical puzzles of asset pricing behavior. This essay shows that the RBC model with habit formation fails to mimic not only the persistence of output growth over business cycle frequencies but that of consumption growth at zero frequency as well. Further, the model yields counterfactually low volatility of equity returns.

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